Copper prices are encountering headwinds as stockpiles in China, the world’s largest consumer of the metal, unexpectedly soar. This surge is raising concerns about weakening demand despite a recent rally in prices.
Typically, Chinese copper inventories peak in March and then decline as factories increase production for the summer months. However, this year, stockpiles held in Shanghai Futures Exchange warehouses ended May well above 300,000 tons, marking a record high for the end of that month.
The unusual rise in inventories coincides with a turbulent period for the Chinese economy, marked by mixed manufacturing data. The official factory gauge for May indicated contraction, while a private survey focused on smaller, export-oriented firms showed modest improvement.
This divergence between global copper sentiment, which saw prices peak at $11,100 per ton in May, and weak Chinese demand has caused prices to slip below $10,000 per ton. Record stockpiles at the London Metal Exchange (LME), reflecting ample supply in the market, add to the price pressure.
“The copper market seems much more sufficiently supplied than some traders had hoped for,” said Carsten Menke, head of Next Generation Research at Julius Baer. “Hence, a rapid turnaround of copper prices thus looks unlikely in our view, and we rather expect the market to consolidate during the summer months.”
Further evidence of weakening Chinese demand is seen in the drop of the Yangshan premium, which has fallen into negative territory since last month. Traditionally, buyers of imported copper pay a premium over the international price. This reversal suggests a shift in power, with Chinese buyers demanding a discount.
Meanwhile, the U.S. economy is also showing signs of a slowdown, as evidenced by the latest Job Openings and Labor Turnover Survey (JOLTS). U.S. job openings fell to 8.06 million in April, consistent with a gradual deceleration in the labor market. This data has reinforced expectations that the Federal Reserve might cut interest rates this year, influencing copper prices further.
However, there is a divergence in forecasts among institutions. Investment bank Liberum predicts a significant price drop if the Federal Reserve starts cutting interest rates, with a projected range of $7,000 to $7,500 per ton, much lower than the current consensus forecast above $8,500. This contrasts with Goldman Sachs’ forecast, which sees the metal reaching $12,000 per ton by the year’s end.
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